John Sevior’s buy call in dispute

John Sevior ... “equities may not be as cheap on an absolute level as they were in 2009 but they are very cheap on a relative basis.”
Photo: Nic Walker

by
Jane Searle

Veteran stock picker John Sevior’s belief that Australian stocks are at their most attractive since the 2009 market nadir has split fund managers.

Mr Sevior, who is preparing to launch his boutique business Airlie Funds Management in November, sparked debate this past week when he told The AFR Magazine’s Power Issue that the market “looks as good in value as it was at the bottom of the market in 2009".

Many fund managers agree, arguing that equities are relatively cheap and offer a greater potential return than asset classes such as bonds. But some senior stock pickers say earnings risks and weak global economic conditions call for caution.

Mr Sevior was happy on Friday to expand on why he is bullish.

“Equities may not be as cheap on an absolute level as they were in 2009 but they are very cheap on a relative basis," he told the Weekend Financial Review, pointing to the gap between equity earnings and the risk-free rate: the 10-year bond yield. Bond yields were about 5.5 per cent in 2009 and now sit around 3 per cent, lifting the attraction of risk assets.

Other fund managers warned that macro risks from Europe’s sovereign debt crisis, the faltering US recovery and China’s slowdown meant it was too early to be optimistic.

“The problem is not with [global equity] valuations but forward valuations," Platinum Asset Management founder Kerr Neilson said. “There will be disappointments with earnings, so while on paper valuations are very attractive, what we don’t know in a world of slow growth is what happens to earnings."

Mr Neilson said there was an ongoing split between the popularity of predictive growth companies that were price makers in their sectors and other stocks.“If you do the work, there are opportunities but we are in an environment where people are reluctant," he said.

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Paradice Investment Management portfolio manager David Paradice echoed the sentiment. “The risks with China and Europe and America make it hard in the short term [to label the market strong value]."

Mr Sevior countered that macro risks were “ever present".

“Of course you have to have an eye to the macro but the controllable elements are the way [in which] you look at company fundamentals," he said.

Balanced Equity Management managing director Andrew Sisson backed Mr Sevior’s thesis, saying investors would look back on 2012 as a good time to buy. But he cautioned that short-term volatility made it impossible to pick the best time.

“My perception is that in five years’ time, we will look back and say it was a good time to buy," he said, warning the market would not necessarily rise in a straight line.

Mr Sisson cited discounted rates of return for many stocks of about 10 per cent as a reason for optimism.

AMP Capital portfolio manager Nader Naemi agreed. “From a relative valuation point, equity risk premium [the excess return of the sharemarket over the bond rate] is very high," he said. “Equity markets don’t need strong growth when the bad news is priced in. Dividend yields are attractive and the cash rate is very low. If rates are cut, the performance of equities will further improve but I wouldn’t be sitting on a lot of cash at the moment."

The market is trading on a forward earnings estimate of about 12 times, up from 8 times at the depths of the financial crisis but below its long-run average of 14 times. The latter can be thought of as the number of years of earnings needed to pay back the purchase price of shares.